Hire purpose

BOOTLEGGERS and bank-robbers were among the first to use car-hire firms when they got going in the 1920s. Nowadays their customers are more likely to be tired and irritable travellers, picking up the keys at an airport hire desk, lacking the energy to quibble with all those optional extras being loaded on to the bill. It is a big business—worldwide turnover last year was about $37 billion. But a wave of consolidation in recent years has left just three firms—Hertz, Avis Budget and Enterprise—with 95% of the market in America and a sizeable share elsewhere. So it ought to be a cosy oligopoly, with the dominant firms feeling no need to compete vigorously.

However, Hertz’s boss, Mark Frissora, does not see it that way. An investor backlash against his undercutting of rivals may be one of the reasons why he quit—officially for “personal reasons”—this week.

Mr Frissora has been under pressure because of accounting errors discovered at the firm, going back to 2011. But analysts at Morgan Stanley, an investment bank, say Hertz shareholders have also expressed annoyance at the way Mr Frissora was being “too disruptive” and failing to “behave” on price-setting. The analysts think he was right: the rising use of smartphone apps to book cars, the emergence of new business models for car-sharing and a renewed interest in the hire business by carmakers together mean that the industry is going to be disrupted anyway, and any oligopoly will not last long.

Hertz and Avis Budget still do over two-thirds of their business at airport counters. Enterprise, the largest firm, with about 40% of the world market, mainly rents out cars in city centres, and in America it has the lion’s share of the market for the cars that insurers lend to policyholders after crashes. Enterprise bought National and Alamo in 2007, a year after Avis and Budget joined forces. In 2012 Hertz bought Dollar Thrifty. But instead of being satisfied with its lot, Hertz has since expanded vigorously in the city-centre and insurance-replacement businesses, and refused to follow rounds of price increases by its two rivals.

There are two reasons why it may make sense for Hertz to sacrifice short-term profits for market share. Smartphone apps for car rentals are killing the hire counter, even at airports, so Hertz (and Avis Budget) will need to replace the easy profits those counters generate. And becoming even bigger may be the best defence against a rising wave of competition from car-sharing schemes of various types, some backed by carmakers. This week Renault said it would join a new electric-car-sharing venture, for which it will make the vehicles. Daimler’s Car2Go service operates in about 30 cities in Europe and America.

Avis Budget, recognising the emerging threat, spent $500m last year buying Zipcar, the world’s largest example of a “car club”, a form of sharing in which vehicles are parked on the streets and users can rent them, using a swipe-card, by the hour. In theory, the giant hire firms are well-placed to operate the car-club model: conventional rentals peak during the week, whereas club-car use peaks at weekends, so they can achieve high utilisation rates by shifting cars between the two services.

Car clubs and other forms of sharing are proving especially attractive to young drivers. That is encouraging the carmakers to return to a business they have dabbled in before (Hertz has been owned by both Ford and GM; and GM once part-owned Avis). Their theory is that when the time comes for young motorists to buy their first set of wheels, they will choose ones that they got used to driving when they were impecunious sharers.